Information that is used on the detail basis, every single day, inside the company.
From the report of Financial Accounting, we knew that Walmart realized $466 billion on sales last year.
For the Managerial Accounting report, we want to know more details on that number. We could list here 10 additional things, to make a specific plan on running that business.
1) How many sales there were by store, country, region?
2) Department
3) Specific item
4) Physical location in the store
5) Season or climate
6) Day of the week
7) Time of day
8) National or local ad campaign
9) Payment method
10) Demographics of buyer
Illustrations of Managerial Accounting Application
– Product costing: how much does it cost to make my product.
– Break even: if I open a store in a new location, I want to know if there will be enough sales for me to avoid having a lost.
– Budgeting: to identify any problems before they happen in a real world.
– Performance evaluation: to get what you measure.
Cost Flows and Product Costing
Let’s suppose some company named Woods Inc is specialized in making custom-made wood furniture.
A customer came and ordered a dining table. The main concern here is a price estimate, based on production costs.
To produce this table, it takes:
– Direct materials, like wood.
– Direct labour, like how many people, for how many, hours at what wage rate will work on this table.
– Machine hours
Overhead
Besides the direct resources to produce the table, we have also to consider what is called an Overhead, related to infrastructure costs.
– Buildings
– Supervisors
– Maintenance
– QA inspectors
– Property taxes
– Insurance
To do an estimate for the total cost of this custom-made table, we could base ourselves on the previous month’s expenses for the overhead.
Per example, last month ABC Inc used:
– Total overhead cost of $500K
– Direct labour hours of 10K hours
– Machine hours of 25K hours
Next, we have to make a choice between Direct Labour Hours and Machine Hours, to calculate the final cost, and the price to set for this table. Perhaps, we could take of combination of these two.
$500K / 25K hours = $20 per machine hour
$500K / 10K hours = $50 per direct labour hour
Let’s choose first the Direct Labour Hours for our estimate.
– Direct materials: $1000
– Direct labour: 30 hours X $30/hour = $900
– Overhead: 30 hours X $50/hour = $1500
– Total cost: $1000 + $900 + $1500 = $3400
Now, let’s do the same, based on Machine Hours.
– Direct materials: $1000
– Direct labour: 30 hours X $30/hour = $900
– Overhead: 200 hours X $20/hour = $4000
– Total cost: $1000 + $900 + $4000 = $5900
Finally, what price to charge to the customer?
It all depends on several other factors to take into consideration, in the actual situation.
The Break-Even Analysis
A charity banquet is organized. Invitations were sent. A ticket costs $250. At this banquet, there is a raffle. At the end, a randomly picked ticket wins a $18000 brand new car.
For the costs, a caterer charges $40 per person for the banquet.
In total, the organization must pay $18000 for a new car, plus $40 per person.
The most important question they must keep in mind, is how many people must attend the banquet, in order for the charity to break even and for the organization to avoid loosing money?
The cost of the car is fixed: $18K
Contribution Margin per person: $250 -$40 = $210
To cover the cost of the car and to break even: 18000 / 210 = 86 people at least must come to the event.
The Benefit of Break-Even Analysis
To counteract the natural optimism of entrepreneurs.
Budgeting
Budgeting is making a systematic plan on paper, so we can see problems before they arise in the real world. Budgets help us to identify and solve those problems in advance.
Example
Some company have a cash balance of $54K at the end of September.
Here is what they identify in advance for the following months in terms of cash receipts and payments:
– October: +$10K, -$50K = $14K
– November: +$10K, -$60K = -$36K
– December: +$40K, -$40K = -$36K
– January: +$120K, -$10K = $74K
As they do their cash flow projection, they will clearly see that they must borrow $36K for November, so they could arrange a pre-approval at the bank in advance.
Some other benefits of a Cash Budget
– Advance arrangements
– Realistic targets
– Hope
Performance Evaluation
Be careful about what you measure in your business, because you get exactly what you measure.
Per example, if you want your purchasing agents to get the cheapest possible materials, then reward them at how cheap they can buy that materials. But, is this what you really want, to sacrifice the quality for the price?
Balanced Scorecard
The balanced scorecard is a tool used in managerial accounting in the field of performance evaluation, which helps to organize the internal measurements of your company, so you can measure all aspects of your business, instead of concentrating only on one thing. Make sure your performance measures align with your mission statements.
Go back to Financial Accounting
Next, learn about Income Taxes Accounting.
